Blue Bottle Coffee to sell controlling stake to Nestlé

Updated 7:37 pm, Thursday, September 14, 2017

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Media: San Francisco Chronicle

Some CEOs in the midst of an international deal might camp out in a boardroom. But James Freeman, having just sold a majority stake in Blue Bottle Coffee to Swiss food giant Nestlé, was answering calls and emails from his Old Oakland cafe on Thursday.

The pace was frantic, and the stakes high: Nestlé reportedly paid as much as $500 million for 68 percent of Blue Bottle. Yet Freeman, the company’s founder, remained calm, because, he believed, after 15 years, he was finally turning an obsession into validation.

The hipster world of single-origin, high-end coffee is now big business. It’s becoming a familiar pattern: Blue Bottle is just the latest beloved local food and beverage brand to sell out after its Bay Area ethos of sustainability and craftsmanship attracted the interest of a large corporation. The series of deals — Scharffen Berger, Anchor Brewing Co., Cowgirl Creamery — have a common thread: Love may be priceless, but capital, the lifeblood of business expansion, is dear.

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Freeman would not confirm the price Nestlé paid. For Blue Bottle, he said, the deal represents security.

“We don’t have to do an IPO. We don’t have to fundraise again. We don’t have to talk to bankers,” he said.

CEO Bryan Meehan will remain in his role, Freeman will continue as chief product officer and Blue Bottle will be run as a stand-alone company from its Oakland headquarters.

The company traces its roots back to a coffee stand at an Oakland farmers’ market in 2002, which eventually led to a San Francisco outpost in a garage off an alley in Hayes Valley. Freeman prided himself on individual servings of pour-over coffee made from meticulously selected beans.

Money, too, poured over Blue Bottle, which attracted celebrity investors including Jared Leto, Tony Hawk and U2 singer Bono, along with firms like True Ventures, Morgan Stanley and others. The company raised a total of $120 million.

Thanks to the cash infusions, Blue Bottle has 35 cafes in the Bay Area, New York, Los Angeles and Tokyo, and plans to add 25 this year, with new outposts in Miami, Boston and Washington. Along the way, it bought Handsome Coffee Roasters, Tonx and Perfect Coffee to expand its offerings to coffee subscriptions and more. Not all deal making went smoothly: In 2015, Blue Bottle and Tartine Bakery announced a merger that would have put loaves and lattes together, but that combination fell through.

Now Blue Bottle will have access to Nestlé’s resources; the Swiss company generated $10.5 billion from its operations last year that could be available for investment, according to its annual report, thanks to its sales of everything from Gerber baby food to Kit-Kat candy bars to Purina dog food.

The very scale of Nestlé, though, could stoke fears among Blue Bottle’s fans who think that the upstart — long regarded as the Bay Area’s artisanal answer to Starbucks — will morph into something far different from its market-stand origins. This year, residents of the Lower Haight rejected Blue Bottle’s plan to move into a space on Steiner Street, because the company is now large enough to qualify as a chain.

“There are people who are worried that this will mess up the things that they love about Blue Bottle,” Freeman said. “That won’t be the case. We have complete autonomy over everything. I just ask that they trust us.”

The new backing from Nestlé could even jeopardize Blue Bottle’s position as a Ferry Building vendor — one with two prominent locations in the landmark for gourmands. The marketplace’s “local grocer” ethos highlights small, independent businesses.

Nestlé has bigger concerns. Its Nespresso one-shot coffee machine is a competitor to the Keurig. And Blue Bottle, if it continues to expand at its current pace, could one day become a legitimate competitor to Starbucks, the world’s largest coffee house chain with 24,000 stores in 70 countries.

Specialty coffee is also on the menu for Germany’s JAB Holding Co., which has spent billions in similar acquisitions, gobbling up Peet’s, Stumptown, Keurig Green Mountain and Intelligentsia, all in an effort to challenge Nestlé’s position atop the packaged coffee market.

Blue Bottle executives and investors say the Nestlé deal will help the company develop its technology, open new cafes and roasteries domestically and internationally, and expand its product lines, among other things.

“Growth requires capital,” said Index Ventures partner Mike Volpi, who led his firm’s investment in Blue Bottle. “Every shop requires around $700,000 to $800,000. When you’re opening 10 in a year, that’s $7 million, so the numbers add up.”

Freeman said the company’s rate of growth won’t change under Nestlé. Doubling the number of cafes each year remains the benchmark. It could also seek to buy better, cutting-edge equipment. Outside of that, Freeman says, the Nestlé deal is validation of a lifelong obsession.

“When I first started, it was a fringe interest. People thought I was just this crank about coffee and they wondered why I obsessed over it so much,” Freeman said. “The specialty coffee world has changed. It’s a beautiful thing to see.”

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